Markets and Central Banks

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The financial world experienced its equivalent of a major earthquake this month when the Swiss National Bank (SNB), the central bank of Switzerland, made a dramatic and unexpected change in policy. In 2011, concerned by the rapid appreciation of the Swiss Franc and, thus, damage to Switzerland’s exporting industries and commercial banks, the SNB instigated a policy of maintaining a peg with the Euro at 1.20 Francs to the Euro. If ever the price of Euros declined against this mark then the SNB would obligate itself to sell Swiss Francs and accumulate Euros to maintain the parity. This policy therefore created a seemingly impenetrable price floor for the Euro against the Franc. Whenever the Euro declined to the 1.20 area traders could take a sure bet that they could sell Francs and use them to buy Euros (technically referred to as “shorting the Franc”), knowing that the SNB would take action to depreciate the value of the Franc and thus increase the value of the Euros that these traders now held. Indeed, that was precisely what was happening and what was expected on January 15th of this year when many traders had just opened long EUR/CHF positions as the currency pair was hovering around the 1.20 area. In recent months, however, the increasingly lax monetary position of the European Central Bank in order to ward off deflation and sluggish growth in the Eurozone – leading to a QE programme announced on January 22nd – led the SNB to maintain an increasingly expensive policy of depreciation of its own currency that risked fuelling bubbles and malinvestments within its borders. Clearly they were spooked by something as no one seemed to be prepared for the sudden announcement, on January 15th, that the SNB would, with immediate effect, abolish the peg against the Euro and the Franc would again be permitted to fluctuate freely. The market was suddenly awash with sell orders for the Euro and buy orders for the Franc that, within the space of a few minutes following the announcement, the Euro depreciated against the Swiss Franc from about 1.20 to around 0.75 – a dramatic drop of 37.5% – and eventually settling around the 1.00 mark. The movement happened so fast that any liquidity between these two points completely evaporated and anyone hoping for an entry or exit between them was pursuing a lost cause. Needless to say, anybody who owned the Euro against the Franc lost an awful lot of money, with some large institutions, such as Citibank, Barclays and Deutsche Bank, losing tens, if not hundreds, of millions of dollars. Particularly hardest hit, however, was the retail foreign exchange market, which in recent years has seen considerable growth amidst relatively lax regulation. Several of these outlets went bust while the largest, FXCM, had to be bailed out by an investment bank with $300m. Retail traders to whom these institutions cater are those who trade “on margin”, in other words, they borrow money to fund their positions. Thus their own equity amounts to only a proportion of the total cost of any trade, often as small as 0.5%. Therefore, a small movement in favour of any particular trade can lead to large profits, while a small movement in the opposite direction threatens not only to wipe out the client’s capital but to leave them owing money to their broker if the trade continues to sink and is not closed out. If this is the consequence of a small adverse movement, imagine the effects of an extremely large move such as that seen on the 15th. The movement was so sudden that stop losses, the trader’s conventional protection against risk, were useless and FXCM was particularly hard hit, being left with $225m worth of client accounts with negative equity. Needless to say, of course, there were also big winners on the other side, particularly those who were either skilful or fortunate enough to own put options on the Franc against the Euro with a strike price close to the former peg.

Standing aside from this entire calamity, what should the Austro-libertarian make of the situation? Profits and losses are supposed to be the result of superior entrepreneurial judgment in directing scarce resources available to the ends most urgently desired by consumers. Those whose judgements are more accurate than anyone else’s will walk away with profits, those who whose are not will be lumbered with losses. In financial markets, this is manifest in, say, the purchase of a stock which demonstrates the willingness to invest capital in the underlying enterprise and that the enterprise is one which will meet the ends of consumers with its trade; or a speculation in, say, the futures market is an attempt at “price discovery” and to prevent the emergence of false prices that would cause resources to be wasted1. However, the overwhelming fact that was laid bare on January 15th is that entrepreneurial fortunes are not made and lost in the financial markets through correct foresight of the desires of consumers – they are made and lost based on the whim of central banks. People are no longer rewarded for best estimating the desires of consumers but for guessing the motivations of the financial lords and masters sitting on their thrones of paper money. The stock market is no longer a place to rationally allocate resources amongst industries but a place to make bets on monetary policy. Indeed most of the significant shifts in a given stock market are made on days when the relevant central bank makes an important announcement. Those who clap their hands with glee when parasitic “gamblers” burned their hands on the day of the SNB announcement and “got what they deserved” should ask the logically prior question of why the financial markets have become such a casino in the first place. For years, central banks have maintained artificially low interests supported by monetary expansion which have made it profitable to plough funds into assets such as stocks at extraordinarily low cost – buoyed up by the, not unreasonable, belief that central banks will act to correct any dips in asset prices. Indeed with interest rates so low, borrowing money to buy assets has become an almost costless affair. Why should anyone follow other, riskier entrepreneurial ventures when this one has almost no chance of failure? Indeed, the SNB’s own commitment to maintain the peg seemed to promise free profit to anyone wishing to buy Euros and sell Francs near the peg, knowing full well that the SNB would be doing the same and hence buoying the value of the Euro against the Franc. Given that central banks have been creating fortunes for years it should come as no surprise when they take them away again, albeit in one, spectacular blow.

There is, however, a glimmer of light that has emerged from the situation – that the reputation of central banks and their pronouncements may have received lasting damage. First, the fact that the SNB reiterated, in no uncertain terms, its policy to maintain the peg a mere month before it was removed indicates that what central banks say cannot be trusted or taken as gospel. Second, the fact that it did so abandon its policy reveals the fact that these institutions do not possess the omnipotence and invincibility that they have led us to believe. In the long run, central banks cannot outwit reality and the market cannot be fought. By accumulating depreciating Euro assets at the same time as appreciating Franc liabilities the SNB was driving itself towards bankruptcy with a ludicrously expensive policy. Perhaps, therefore, the sudden realisation that the emperor has no clothes will cause bankers, economists, investors and speculators to look at central banks with a more critical and sceptical eye. May be there will then be a chance that the fatality of the pursuits of the more important central banks, such as the US Federal Reserve, will achieve widespread realisation.

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1DuncanWhitmore, Speculation, duncanwhitmore.com

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Talent in Society

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Extremely talented individuals are often lauded for their achievements in apparently furthering human endeavour and accomplishment. While effort and hard work is a vital component of any great achievement so too must we recognise that particular individuals are especially gifted by nature in one way or another and that lesser beings such as ourselves have little hope of matching the achievements of these people, however hard we might work.

However, the precise talents that we are wont to recognise and celebrate today all appear to be concentrated in highly specific areas. The artistic and sporting talents of actors, directors, football players and so on – and the often very lucrative salaries that professionals in those areas can attract – receive not only a (sometimes obsessive) degree of praise and attention but also an overwhelming amount of encouragement and nourishment. Television shows such as The X-Factor and Britain’s Got Talent attempt to attract hidden singers and artists amongst the general public; children at school are persuaded to “express themselves” and find their “artistic personality” and to “aspire” to “creative” achievements.

There is nothing basically wrong with any of this, of course, and talent should be encouraged where it is found – although with children one might to wish to ensure that they are literate and numerate before attempting to find their “inner selves” and deceiving them too much into thinking that they are likely to emerge as anything other than normal, regular taxpayers. The problem is that when you strip out any highbrow rhetoric all of these talents – even great art, stirring music and record-breaking sporting achievements – basically achieve little more than provide entertainment; they are luxuries that must be funded out of more basic, material productive accomplishments. One very vital talent, the one talent that both provides all of the resources that maintain our standard of living and provides the wherewithal for us to enjoy art and sport is ignored. This is the ability to serve the needs of consumers as the head of a productive enterprise – in short, entrepreneurial talent.

The role of the typical leader of a multinational business, far from being lauded as a pinnacle of accomplishment and receiving praise and adulation for directing scarce resources to the ends that consumers most desire, is usually painted as a greedy, overpaid “fat cat” who exploits his workers and customers. Although it is true, of course, that many of these large firms are in bed with government and do not necessarily achieve their riches through voluntary trade, somehow one does not sense that this is the consciously acknowledged reason for the zealous lambasting thrown in the ir direction and that this attitude exists in spite of, rather than because of, any government ties. So-called “public service” – in other words, becoming a bureaucrat who leeches off productivity rather than creates it – is seen, for its alleged selflessness and altruism, to be a more noble pursuit that stooping into the grubby gutters of business. In reality the contrast between entrepreneurial talent and political talent is completely the other way round. Entrepreneurs have to be able to direct the scarce goods available to their most highly valued ends in order to bake a bigger pie; politicians, on the other hand, do nothing more than persuade everyone else why you and your sponsors should have a larger slice of that pie without adding anything to it.

Our inability to recognise and nurture this very vital talent upon which our lives depend is nothing short of tragic. Even television programmes that highlight the entrepreneurial spirit paint aspiring entrepreneurs as either whimsical and unrealistic day dreamers to be laughed at (such as in The Dragon’s Den), or as hard-hearted, self-centred and antagonistic (such as in The Apprentice). Popular entrepreneurs such as Richard Branson have had to mould their image as an underdog, portraying the mainstream, established business community as greedy and exploitative of the consumer.

Of course it is hard to believe that the entrepreneurial spirit will ever be entirely killed as there will always be people hot on the heels of any profit opportunity. But when we are doing all we can to kill or ridicule the entrepreneurial spirit and when we create more “profit” opportunities through fleecing the public rather than serving them we have to begin to wonder how our standard or living will be maintained in years to come. At the very least, the great entrepreneurs of the future – the John Rockefellers, the Henry Fords, the Andrew Carnegies, the Bill Gates– are unlikely to be from the West, and Asia will take over as the productive power house of the world. We in the West will simply become lazy and dependent, expecting our mouths to be filled with goodies by someone else’s spoon. Although all of this might seem like a relatively minor issue compared to what else is going on in the collapsing Western Empire – debasement, debt, war, and so on – it is all part of the same calamitous catalogue of problems that we face. By recognising the true origin of productivity and encouraging the genuine virtue in entrepreneurship then we can, at least, begin to pull some of the nails out of not the West’s coffin and bring us on a path towards resurrection.

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Economic Myths #4 – Profits are Evil

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One of the elements of any economic system founded upon free exchange that induces a purple-faced rage amongst statists and progressives is the concept of profit. This residual – the amount left over once an entity has deducted its costs from its revenue – is said to line the pockets of greedy shareholders while exploiting labourers and consumers.

First of all it is important to understand what we mean and what we do not mean by profit. Here we will be discussing profits that an entity may earn purely as a result of voluntary trade and free exchange; we do not mean those “accounting” profits that entities may earn as a result of favourable government regulations, direct government subsidy or any kind of residual of a trade relationship based upon force. These profits – including bank bailouts and stimulus funding – are rightly to be condemned as unjust and immoral, sustaining the power base of the incompetent, wealthy elite at the expense of everyone else. But such a condemnation must not be allowed to throw out a very precious baby with repulsively filthy bathwater – for profit is one of the most vital elements that gives life to an economic system that relies upon the division of labour.

For the praxeologist profit is, of course, endemic in any human action and not just those based upon monetary calculation. All actions seek to produce better circumstances than those that would prevail, but for the action. All humans in everything they do therefore seek for a psychic profit – making more money than before is only one of these possible actions. Strictly speaking, therefore, any condemnation of profit would be a performative contradiction as, in the mind of the critic, the satisfaction of achieving condemnation would be a better circumstance than not having done so. Although such a technical and theoretical argument is unlikely to appeal to the mass of lay persons who view profits as evil and unjust, it is important to understand the roots of the concept for here we can see the importance of the profit motive – the stimulus for engaging enterprise in the first place. Without the possibility of earning profit – i.e. a better circumstance than that which prevailed before – no entrepreneur or inventor would ever bother developing and bringing to market all of the wonderful products that make our standard of living so high.

Abandoning for a moment our commitment to wertfrei economics and embracing the belief that anything that benefits the consumer or labourer is “good” and anything that harms him is “bad”, let us examine two or three specific, recurring myths concerning the concept of profit.

First of all, let us deal with the allegation that profits line the pockets of the capitalists at the expense of workers and consumers. Profits are not achieved at the “expense” of anybody. The amount of profit is only ever determinable in retrospect after all of the consumers have purchased their wares and all of the workers have been paid their wages. At the time that the consumers bought the products and the workers negotiated their terms of employment nobody knew what the profit was going to be – or even if there would be a profit at all! If you felt that you were being “fleeced” at the time you purchased a product or sold your labour then why did you enter the transaction? If a firm should be required to divest its profits back to those whom it has cheated and stolen from then what happens when the firm makes a loss? Does it work the other way round too? Did not the customers and the workers cheat the firm in this instance? Should the firm be able to go back to a customer who may have purchased an item six months ago and take more from him to wipe out the deficit? Profits, instead, benefit the consumer by ensuring that scarce productive resources are devoted to their most highly valued ends – industries and production lines where profits are abnormally low will have resources reduced and redirected to areas where they are abnormally high, thus decreasing supply in the former and increasing it in the latter. Ironically, the combined action of entrepreneurs has the ultimate effect of eliminating all profit by balancing resources throughout the economy. It is only because consumers’ tastes and preferences are constantly changing that profit opportunities continue to exist and deployment of resources must be repetitively assessed and altered accordingly. Ultimately, therefore, it is the consumer who is responsible for the existence of profit and not the capitalist-entrepreneur. Furthermore, it is profit that provides entrepreneurs with the resources to further invest in capital equipment and expand the business. This will increase supply and lower prices.

Second, even if the concept of profit for inducing enterprise was accepted, what of the allegation that profits are really used to “extract” money from the industry to pay shareholders – money that would otherwise be invested back in the business to the benefit of consumers? What this overlooks is the fact that if a distribution is made to owners or shareholders it is because the entity has already invested in the business to the extent that is economically viable and any further expansion would be wasteful. While the firm may retain some additional earnings as a buffer in anticipation of a poor performing year or for some other kind of insurance, masses of retained earnings are otherwise wasted by lying in corporate bank accounts. It is better to distribute those funds to the shareholders so that they can be reinvested in other productive enterprises that are still in need of investment. Thus the consumer is benefitted by this fresh investment in other products and services that ensures that the supply of these can also be increased and their price lowered.

Finally, it is worth emphasising that which we indicated above – that profits are never certain and the possibility of their corollary – loss – is always present. Capitalist-entrepreneurs do not first of all calculate how much profit they want and then work out how much they will pay for inputs and charge for outputs. Such a calculation may form the motivation to engage in enterprise and it might determine the boundaries of their productive action but they cannot force the outcome to agree to their projections. Rather, they must be prepared to be the highest bidder for inputs and the lowest seller for outputs in order to ensure that they can purchase resources on the one hand and then sell the resulting products on the other. This process is fraught with uncertainty and only at the end is it possible to ascertain if it has been profitable – and, indeed, a certain line of production which may hitherto have been profitable may suddenly find it is loss-making. All it may take is a marginal increase in costs as a result of competing entrepreneurs bidding away resources to other uses, coupled with no corresponding increase in sales in order to completely wipe out any profit. Or may be consumer tastes change and competing products and services become more attractive? Although profit is the motivator of entrepreneurial activity it is never certain and everyone else must be paid in full before it can materialise, if it does at all.

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Labourers, Capitalists and Entrepreneurs

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Libertarians are well aware of the Marxist myth that labourers or employees are “exploited” by the capitalists, the entrepreneurs, the employers and the bosses, the former producing all of the valuable output in society and only permitted to consume enough to keep them at bare subsistence while the latter cream off the fat and live a life of carefree opulence.

The details of the economic fallacies of this position we will not explore here. Rather, the issue we wish to concentrate on is the common misperception that is “easy” to be a capitalist-entrepreneur (whom, hereafter, we will refer to as a “businessman”) and back-breakingly “difficult” to be a labourer. Such an impression is hard to dispel when, after all, the majority of the population are labourers, only a slim minority are businessmen and the relationship between the two is nearly always at arm’s length. Don’t the businessmen have the luxury of dictating to us the terms of our employment, our wages, what time we have to be there in the morning, what time we can leave, when we can have lunch, how often we can go to the toilet? And don’t they then decide when they’ll let us in to the shops to buy the stuff we need, setting the prices we must pay to ensure themselves enough profit, and us having to choose from whatever they have decided we can buy? Aren’t we just lucky to have whatever scraps that they throw down to us from their table? Although there will always be a natural antagonism between boss and employee the latter should think twice before becoming too envious of those who offer him work by failing to realise the pitfalls of becoming a businessman and ignoring the advantages of remaining as a labourer. Let us explore some of these in detail.

First of all, as a labourer you have the advantage of receiving your income first and incurring your costs later. The businessman pays you immediately once your work is complete and then you have a definite amount of money in your hand right now that you know you can spend on whatever you like. Furthermore, you do not have to wait until the product that you are working on for the businessman is completed before receiving this income, which might be weeks, months or even years before it reaches the hands of the consumer. No, you get your money now, cash in hand, with no waiting. And once you go to the shops you know the prices that you will pay so you can estimate easily how much you can spend and how much you can save in order live sustainably. In short, living as a labourer has a high degree of certainty. Labourers do, of course, partly share in entrepreneurial burdens. Not only do they have to know which skills are the best to offer prospective employers but they also bear the risk of redundancy in the event that the employer is forced to cease trading, or if the entire industry in which they work should become obsolete. But his entrepreneurial risk is greatly diminished compared to that of the businessman. Moreover, as a labourer, there is normally a strict starting point to your day and a strict ending point. Yes, you have to turn up and work for those eight or so hours in the day between those times but the time outside of that is yours and work, except for the very highest salaried employees, does not have to interfere with your leisure time.

Let us contrast this with the position of the businessman. He does not have the benefit of receiving his income first and incurring his costs later. Rather, he must first of all save and then burden himself with costs (including your wages) on an operation without knowing precisely how much this operation will yield in income. Indeed, the whole operation might bring him a net loss. He doesn’t know precisely what the outcome will be and he is, indeed, taking an enormous risk by entering this venture. It is simply anticipation on his part. Yet you, even if you participate in his operation, have been insulated from this by being paid up front. The businessman doesn’t come back to you after the end of a loss-making year and demand some of your wages back. You get to keep everything whereas he may lose a significant portion of his wealth. Equally and oppositely, therefore nor should he be expected to give you some of his surplus at the end of a profitable year. Furthermore, while businessmen as a whole “set prices”, any one of them does not do so as he pleases. Rather, he has to compete with what other businessmen are willing to pay for their inputs on the one hand and sell their outputs for on the other. The prices he pays for goods, raw materials and your wages to produce the goods he will sell are set not by him but by the bids of all the other businessmen who wish to uses these resources in their competing operations. Our businessman must be prepared to pay at least as much as they are if he is to secure the inputs necessary to run his business. Indeed one of the great Marxist myths – that the capitalists drive down wages to the lowest possible – is made plainly untrue by this fact. It is the competition between businessmen that drives up the wages of labour as it increases the demand for it. What is likely to reduce wages, on the other hand, is the existence of other workers as each new labourer adds an additional supply of labour, especially in particular industries where certain skills are necessary for which there is a finite demand. Indeed one of the reasons why unionised labour has always supported the minimum wage is to make the lowest skilled workers unemployable and reduce the competition for their more highly skilled members, thus raising the wages of the latter at the expense of the former. So much, one might say, for the collective interests of each class. When it comes to the prices of the product to be sold, the businessman must similarly compete with all of the products offered by his competitors for the contents of the consumers’ wallets and purses. His prices will therefore be determined by all of the other asking prices of his competitors and he must be prepared to offer a low enough price to draw consumers away from these other businesses1. Once a product is produced it is normally in a businessman’s best interests to sell it as quickly as possible. He does not have the luxury of “un-producing” it, winding back the clock and choosing to do something else. Rather, he is stuck with it and the longer he holds onto it the more likely it is that perishable items will simply be wasted and more durable items will incur further costs of storage. The only option, barring the possibility of personal use (which is obviously impossible for any large scale business) will be to sell it. Very often, therefore, the supply curve for a businessman will be vertical, meaning that he is prepared to take whatever the consumers will pay for his wares. If this is not enough to cover his costs then he will go out of business. He only earns a profit if the consumers are prepared to pay more than the product cost to produce. Occasionally a business may hold onto goods in the anticipation that their prices will rise at a later date, but this is normally the function of speculators in commodities and raw materials which have a diverse range of potential uses and not the function of manufacturers and vendors of highly specific, consumer goods. While businesses as a whole set prices, therefore, any one business is highly restricted in the prices it pays for its inputs and the prices it receives for its outputs and it takes tremendous skill and foresight to ensure that the latter is higher than the former.

Furthermore, the profits that a businessman will earn if he is successful in this regard are in no way “deductions” from wages. Rather, properly considered, wages are deductions from profits. When an businessman brings his produced product to market on a certain day, it will sell for whatever people are prepared to pay for it that day and the businessman will consequently earn certain revenue. If, for the sake of argument, he had been able to bring that product to market without incurring a single cost then his profit would be his entire revenue. In the real world, however, he must incur costs and every single cost, including wages, that has brought him to the position of being able to sell that product is a deduction from that revenue and only the remainder is the resulting profit. If the deductions are too high then he makes a loss. Indeed, this is precisely how a company’s income statement is laid out – revenue at the top followed by costs deducted leading to the final figure which is the profit; hence the expression “the bottom line”. If another businessman brought the same type and quantity of products to market on the same day he would earn exactly the same revenue as our first businessman, but if this second businessman had done so while incurring fewer costs then his deductions would be lower and his profit would be higher. Every time a businessman considers hiring one more employee he has to estimate whether the additional revenue gained from doing so will be higher than the deduction from that revenue he must pay out in wages. In short, your help in his enterprise allows you to pinch from his pie upfront, and only at the very end, after you have vanished, does he know how big the pie is. If he is unsuccessful you, the labourer, might well have left nothing for him.

Another myth we need to tackle is that capitalist-entrepreneurs automatically become rich. For every successful entrepreneur there are a dozen or more failures because the ability to judge, in advance, which products and services consumers will want to and how much they are willing to pay is a rare skill; hence it is very highly rewarded when it is successful. In a genuine free market there would never be a “class” of capitalists or of entrepreneurs. Rather, everyone would be free to risk his money in a new business if he believed that he had identified a marketable good or service. What gives us the illusion of a capitalist class today is the government protection accorded to large, established businesses and their owners and managers. Indeed the cash-bloated financial sector has only swollen to its titanic size because of the largess that government lavishes on this industry, whereas in a genuine free market financial services would earn the ordinary rate of profit. Furthermore, government makes it extremely difficult to start a new business, crushing it with the cost of crippling regulatory requirements before the budding entrepreneurs can give thought to more relevant things such as their product, their customers and their genuine costs. All this serves to make the businessmen an impenetrable caste of permanent membership, hence increasing the resentment of their position. Furthermore, it is possible to mistake the volume of money sloshing around in a business for the wealth that business possesses. It might be awe-inspiring to see a company’s bank statement raking in millions of pounds a month whereas you, as a little labourer, might only earn a thousand pounds in the same period. But deep pockets are usually raided by fatter hands; just as the income is much greater than yours, so too are the outgoings. It matters not a whit if a company is seeing income of £1 million per month. What matters is the differential between the revenue and the costs. If, in order to earn £1 million pounds the business had to pay out £1.1 million pounds then it would be left with a net loss of £100K. Just because lots of money is coming in to the bank does not mean that a company has endless amounts of cash to play around with and this is compounded by the fact we mentioned earlier of businesses having to incur their costs before their revenue is received. At least as a labourer if you decide to spend a bit more on some luxury in a certain month you still have the ability to calculate precisely what you will have at the end of that month. Businesses do not have this ability and particularly where profit margins are slim only a very slight tipping of the balance into the red can cause money to evaporate very rapidly.

Related to this aspect of the volume of cash in a business is the so-called “inequality of bargaining power” – that businesses, being so big and wealthy are more “powerful” than the tiny labourer who has to come, cup in hand, for whatever he can get. There is, however, no such thing as “bargaining power”. Each party enters a contractual agreement because they each desire something that the other possesses. The value of one party gaining what is yours is in his mind and is not inherent in you. If you are able to negotiate terms that are very favourable to you it simply means that he values what you have more than you value what he has. You have no control over this aspect and all it would take is for someone else to come along and offer something that is better than what you have. Secondly, and, ironically, it is not the growing and profitable businesses – the ones who have “bargaining power” – that tend to be restrictive on how much they are willing to pay in costs. The enthusiasm of a new entrepreneurial venture coupled with the either the anticipation or the reality of large profits results in a lower degree of scrupulousness in controlling costs and the very opposite of a Scrooge-like approach to hiring workers. Indeed it has been estimated that entrepreneurs as a whole pay too much in advances for their inputs and make an overall loss, with even the big winners failing to cancel out the losses of the big winners2. The point at which businesses become tight-fisted is when there is strong competition in a saturated market, driving down profit margins resulting in the need to cut costs in order to stay ahead. In other words it is when profits are low – i.e. when a business’s bargaining power is restricted – that causes a business to demand less favourable terms for its employees. There is also the alternative possibility that a business can grow so large that it soaks up the entire supply of an input and hence is said to be insulated from competitive pressure in setting the prices it pays. This is the frequent allegation that is made against large supermarket chains such as Tesco in their dealings with small suppliers. Of this we can say three things. First, in a genuinely free market, if a business has grown that large then it has done so because it has met the needs of consumers better than anyone else. Secondly, such a behemoth contains the seeds of its own destruction as size and domination leads to complacency and stifling innovation, giving opportunity for more nimble and enthusiastic start-ups to enter the fray and draw away suppliers with more favourable terms. Indeed the evolution of the technology sector may, perhaps, illustrate this. Microsoft dominated the PC age; Google the internet age; and Facebook the social networking era. No one firm was able to retain its dominating influence as consumer focus shifted from one thing to the next. Indeed already we are perhaps seeing a waning of social networking with Facebook’s acquisition of WhatsApp specifically for the purpose of attracting a younger audience for whom instant communication through smartphone technology has proven to be more important than creating a profile on a website. Who will dominate this latter era, if it proves to be one, remains to be seen. Thirdly the large corporate monopoly as we have come to know it is most often sustained by government and not by its consumers. Regulatory privilege, artificial barriers of entry and direct government contracts insulate these firms from actual and potential competition, meaning that their “bargaining power” is bestowed by nothing more than government force and fiat. Clearly this would not be the case in a genuinely free market.

What we have seen therefore is that being a businessman is far from easy. Yes there may be the reward of large profits but the path to success, in a free market at least, is fraught with uncertainty and difficulty. Life as a labourer may be relatively low paid, dull, repetitive but at least it is relatively secure and certain. We should end by reinforcing the fact that throughout this essay we have been talking about businessmen who earn their profits through serving the needs of consumers – those who have successfully determined the needs of their customers and directed the scarce resources available accordingly. We have not been referring to the government-protected or what we might call the “political” entrepreneur who has won his riches through lobbying and government protection. These latter creatures should be reviled for what they are and by pressing ahead for the establishment of a genuine free market we can enjoy watching their ill-gotten fortunes evaporate into the hands of those businessmen who truly know how to serve our needs.

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1Contrary to another popular myth competition is not restricted to particular industries. If you are sell apples then it is in your interests to draw people away from spending their money on, say, cinema trips just as it is on other apple vendors. All businesses are competing for the finite contents of consumers’ bank balances.

2Virginia Postrel, Economic Scene; a Vital Economy is one that Suffers Lucky Fools Gladly, New York Times, September 6th 2001: “If the few big wins cancel out the many losses, starting a business would be a risky, but rational, bet — the sort of investment a “cautious businessman” might make. But Professor [John V C] Nye [economic historian] argued that the wins and the losses probably don’t cancel out. Even the biggest winners don’t make enough money personally to cover the losses of all the individuals who went into businesses that failed. The big winners are usually people who, based on rational calculations, shouldn’t have bet their time, money and ideas. They overestimated their chances of striking it rich. But they were lucky and beat the odds. Even more important, the lucky fools create huge spillover benefits for society: new sources of wealth, new jobs, new industries offering less-risky opportunities, new technologies that improve life. Entrepreneurship does generate net gains, but most of those gains don’t go to the risk-takers. The gains are spread out to the rest of us. Capitalism, in this view, works by exploiting the capitalists themselves.”

Politicians and Entrepreneurs

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When perusing much public discourse concerning those in government and those who, say, are businessmen and entrepreneurs, one of the more striking aspects is how their economic roles and motivations are viewed as the complete opposite for what they really are.

Even though their achievements may, from time to time, be lauded, the businessman, entrepreneur or capitalist is almost universally despised for what appear to be his motives of greed, selfishness and exploitation. Central to this is the profit-motive, a factor that seems to receive exclusive attention at the expense of any other. Yes, it is true that people are in business to make money and usually as much of it as possible. But this completely overlooks the fact that no businessman is in a position to force anyone to contribute to his income. He can only gain a return on his investment if he is able to accurately devote the scarce resources available to the most highly valued ends of consumers. Even if he has no charitable motivation or any emotive feeling towards the people whom he serves, at the very least he is required to have a superior empathetic understanding of their tastes and desires. If he fails in this regard then the result is not a bumper profit but an eye-watering loss. All transactions, therefore, between businesses, their customers and their employees are entirely voluntary. People enter voluntary transactions because they expect to be better off as a result of them. Nobody is therefore put into a worse position through his interaction with a business, or at least they expect not be.

Counter this with the view of the politician. Reading the list of supposed motivations for government office one would think that only those with an angelic disposition need apply. Not only are they expected to be selfless and altruistic, thinking only of their “people” and of their “nation”, they are also supposed to be utterly devoid of any kind of personal ambition. Asked whether he/she has any eye for high office, one is normally retorted with the rhetoric of “public service” and the apparent fact that the budding statesman is just there to “do his job”.  In short, the implication is that government employment produces universally good and wonderful things that apparently require some kind of sacrifice for which there is very little reward. Nothing could be further from the truth. Government receives its revenue from taxation, and taxes are paid compulsorily. Whereas the entrepreneur has to risk the entirety of his wealth in order to persuade his consumers that what he produces is worthwhile spending their money on, a politician faces no such restraint. They can charge as much as they like, deliver services that are despicably dire and command a personal income that far exceeds what they would be able to obtain in the free market. Furthermore, because the funds for all of their boondoggles have been levied by the threat of force, there is a very real loss experienced by the taxpayers, even if the resulting service is relatively “good”. For none of them would need to be forced to pay up if the government’s ends where truly what they most highly desired to do with their money. Whereas an entrepreneur makes everyone – himself and his customers – better off, the politician only makes himself and the recipients of his tax loot better off. Those who have been forced to pay are left substantially worse off.

These fallacious views have played themselves out recently in the whole debacle of corporate tax avoidance. Few overlook the fact that the likes of Amazon and Starbucks rake in large revenues (if not apparent accounting profits) that somehow requires them to “give something back” to “society”. Yet what is forgotten is that they have only been able to obtain these revenues and profits through voluntary exchange because they have created employment and served the needs of customers by providing them with products that they want to buy. Yet for some reason we think it is just to charge them for this “privilege” of serving our needs. Further, is there not something incongruous about the whole rhetoric of “giving back”? I want a coffee so I go to Starbucks; I give them money, they give me coffee; they have already given in the form of a product that meets my needs. If Starbucks has to “give back” then why don’t I have to “give back” their coffee? Why am I, through the route of taxation, effectively allowed to renege on my side of the bargain?

A similarly related fallacy is that anyone who “owns resources” (i.e. land and capital goods) effectively just has to sit back and earn a perpetual income by virtue of this ownership. Although space precludes a detailed examination of the economics, a net return can only be earned from such ownership if the good is directed to a use more highly valued than that anticipated by other entrepreneurs. Failure to do this will simply result in losses. Try telling the owners of Woolworths, HMV or Blockbuster that ownership of resources is a path to perpetual wealth and income. If anything, it is the government that yields a perpetual income from resources. For it can confiscate anything it wants by force, and display zero entrepreneurial talent with its use by spending it on any wasteful project it deems desirable to itself and its cronies. The only say we have in the matter is an “election” between approved and screened candidates once every four to five years.

Whenever one is presented, therefore, with an opinion on the characters of businessmen on the one hand and of politicians on the other it is best to assume that the stated characteristics should be reversed.

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Greed

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All too often one hears the repeated lament that the reason for boom and bust, widespread poverty, the increased inequality of incomes, endless warfare and whatever else happens to be plaguing the world today in the eyes of the saintly commentator are because people are afflicted by greed. “If only people weren’t so greedy then everything would be fine!” chants the typical appeal.

However even a brief thought will reveal the empty nature of this word as a basis for criticism of the current social, political and economic order. This is not to suggest for a moment that the order is perfect or even right, nor that some people are not endowed with malicious intent. Merely that pursuing the problem with reference to “greed” is simply meaningless.

There seem to be two strands to any accusation of “greed”. First, that the alleged perpetrator desires to “possess wealth, goods, or objects of abstract value with the intention to keep it for one’s self, far beyond the dictates of basic survival and comfort” (as Wikipedia puts it) – i.e. that greed is the desire for some form of excess. Secondly, that only some people are afflicted by this menacing motivation whereas the rest of us are apparently content to languish in undemanding modesty.

Taking the first problem, if some people want or desire some kind of excess then we are entitled to ask excess of what. If something is excessive then what we are measuring, what is the unit of measurement and at what point of the scale is acceptability divided from excess?

One plausible possibility is that we attempt to gauge the value that a person’s desires or possessions would bring to him/her subjectively, what might be called “psychic income”. But why should this condemn a person as being the epitome of moral filth? If I get an immense amount of utility out of something that is, to all intents and purposes, useless to other persons what harm is this causing? Is it wrong for me to gain pleasure where others do not? What if I possess an object that gives me unimaginable psychic income, that makes me the happiest person alive, yet is, to everyone else, of little or no value? What has it got to do with anyone else that I enjoy this thing so much? This may sound like an exaggeration, but when you consider that many people have in their possession objects that to them carry great moral sentiment – wedding rings, photo albums, etc. – whose market value is but a pale reflection of the value they hold for the owner then it is not so far fetched.

In any case, even if gaining “undue utility” from an object was reprehensible, how do we measure this excess of subjective value? What is the cut off point? Utility is ordinal not cardinal – we can only rank things in order of how much we value them, not in precise quantities of value. A simple order never gives us any clue about how much something is valued, only how it is valued relative to anything else.

A second possibility is that we attempt to determine a person’s greed by the market value of his desires or possessions. But the market value of an object is simply a hypothetical price that someone might pay if offered the object for sale. It is dependent entirely upon the valuation of everyone else and is subject to constant and unceasing change. Indeed, strictly, market prices are only estimates. Real prices are historical events that bear no relation to future events. But leaving that aside let’s assume that a person’s possessions and/or desires command an exceptionally high market price. All this tells us is that everyone else values those possessions or desires extremely highly also. Why is a person to be condemned for this? Is it my fault if everyone also wants what I want or have? What if my family photo album was discovered to contain the prized, lost work of a celebrated artist or my wedding ring was found to contain a precious mineral and suddenly these objects, overnight, go from being practically worthless to potentially fetching millions of pounds in a sale. Am I now guilty for wanting or possessing these objects? Why should the fact that other people have changed their view of my possessions condemn me as being “greedy” for wanting to retain this property for myself? Should I be divested of my photo album and my wedding ring and the proceeds distributed to combat my alleged greed?

This unravelling of any accusation of greed begins to show the true motivation of the accusers – that it is really based on their envy rather than the possessor’s “greed”. This leads onto the next problem which is the idea that only some people are greedy – the “haves”. Everyone else is spared the condemnation. But would any of the latter turn down the offer to have their wealth increased beyond the so-called “dictates of basic survival and comfort”, even if it meant that no one else’s was? According to elottery-syndicates.com more than 32 million people play the UK National Lottery each week, well over half the eligible population. All of these people want to advance their own wealth to a great height (at least several million pounds worth in the regular lottery game while the jackpots in “Euromillions” game can run to over £100m after repeated rollovers) while leaving everyone else’s in exactly the same place. “Greed” therefore appears not to be an isolated motivation but one that is shared commonly.

Indeed, it is part of the human condition to always seek improvement to the current state of affairs as they are appraised by the individual. Every human action is an attempt to substitute more desirable ends for less desirable ends with the means available. To seek an end to this is to replicate the fallacy on which so many political philosophies have foundered – that the natural condition of man, with all of his qualities and faults, can somehow be moulded or changed. Any viable political philosophy must account for the true nature of man, warts and all. Further, as a result of humans’ unceasing appetite for improvement “the dictates of basic survival and comfort” change with each generation. In the second decade of the twenty-first century no one thinks that you are greedy if you can afford a house, a car, a telephone, a refrigerator and an annual foreign holiday. In the same decade of the twentieth century such possession would have been the utmost display of ostentatious luxury. As demand is often elastic it has always been the case that what has started out as luxury consumption of the rich has inspired entrepreurial activity to mass production until supply can be increased so heavily that even the poor can afford what was once a symbol of great wealth. Any attempted measure, therefore, of “the dictates of basic survival and comfort” is entirely arbitrary.

There are numerous related fallacies to the so-called greed problem. One is the idea that because one person has something another person must necessarily be without – that one person’s gain is necessarily another’s loss. If I have an iPad does that mean that someone does not have an iPad? No, it does not. I have an iPad because I went to work and created goods or services that I exchanged for money which, in turn, I exchanged for the iPad. The iPad only comes into existence because I created the resources that enabled me to purchase it. If I did not it would not mean that someone else would have it – it simply wouldn’t exist. Now there are definitely people in the world who do not fund their lifestyles from such production and voluntary trade but rather from violent appropriation of other people’s product, and some of them are very rich. But this should be dealt with for what it is and condemned accordingly. Per se one individual being a “have” does not mean that another is a “have-not”.

Another thread that seems to weave itself through social and political commentary is the idea that the net wealth of the rich is sitting around in a bank account somewhere, ready to be enjoyed as luxury consumption. This could not be further from the truth. The productive rich (as opposed to those who live off Government privilege and violently appropriated revenues) are rich because they have abstained from consuming what they have and invested it in real, productive assets – factories, machines, equipment, and things that must be run by people with jobs. Their increased net wealth reflects the success of this enterprise. It means more jobs for the rest of us to go to every day and cheaper goods for us to buy when we go shopping. The rich are rich precisely because their investment decisions have proved to be so productive. If this wealth was to be liquidated and distributed amongst everyone else in the name of “sharing” or “combating greed” then you would have to destroy the entire productive apparatus of the economy and place it in the hands of those who do not have the capacity to save rather than consume and, even if they did wish to save, have no or less of a proven ability to direct resources to their most productive uses. In contrast the amount of consumption spending by the rich, if distributed equally, would barely be enough to give everyone a few extra pennies.

In sum all of this reveals that it is a mistake to concentrate on people’s motivations or desires in achieving their ends. If somebody does something that inflicts no violence on either me or my property or if I trade with him peacefully and voluntarily then it is no business of mine why that other person engaged in those activities. What matters to me is the method of achieving those ends. Let us, therefore, banish any more talk of “greed” and focus instead on ensuring that more of our “greedy” entrepreneurs and businessmen make their wealth the honest way – voluntary trade, saving and capital investment that provides us with jobs and affordable products – rather than through violently enforced Government privilege, tax revenue and bailouts that definitely leaves them richer and us poorer.

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